In the governing body, the legal representative of a company in China holds full liabilities. However, senior executives in China, who do not simultaneously hold the legal representative role, can face civil or criminal liabilities.
Underestimating the role and responsibilities of senior executives can raise risks for both the individual and the company. Senior executives direct, plan, and coordinate the business operations of the company. And responsible for formulating the company’s policies and strategies. Hence, company violations can be linked to senior executives – especially if they neglect fiduciary duties and abuse their authorised power.
Below, we outline the main roles and responsibilities of senior executives according to the Company Law to assist companies in hiring qualified senior executives.
Senior Executive Accountability
The corporate governance structure plays a crucial role in governing senior executives in China and holding senior executives liable for any abuse, negligence or violation of their responsibilities.
Senior executives are accountable to the board of directors or executive director, where there is only one director. Equally, there is internal supervisory in which, the board of supervisor or sole supervisor supervises the board of directors and senior executives.
- The board of shareholders holds the highest authority and determine the major issues in the company.
- The shareholders appoint the board of directors (“BOD”) to oversee the company’s daily operations. The BOD is accountable to the board of shareholders.
- The senior executives are appointed by the BOD and manage the day-to-day operations of the company.
- Both the BOD and senior executive are regulated by an internal supervisory system, namely the board of supervisors or the supervisor (“BOS”). For more information on the supervisory system, please see the article ‘The importance of supervisors in corporate governance; high trust and understanding’.
Though the Company Law sets out the corporate governance for companies in China, We recommend the reporting line is clearly stated in the articles of association (‘AoA’) of the company. Therefore, the governing structure is established from the start and the company is governed, according to the AoA.
Under Article 216 of the Company Law, senior executives in China include the general manager, deputy general manager, chief financial officer, secretary of the board of directors (for listed companies) and other personnel designated by the company’s articles of association.
Roles and Powers
Under Article 49 of the Company Law, the roles and powers of senior executives are provisions below:
- Oversee the production and business operations of the company
- Organise the implementation of the resolutions of the board of directors;
- Organise the implementation of the company’s annual operational plans and investment plans;
- Draw up plans for the establishment of the company’s internal management departments;
- Draw up the company’s basic management system;
- Formulate the company’s specific rules and regulations;
- Propose the appointment or dismissal of the company’s deputy manager and financial principal;
- Decide on the appointment or dismissal of executive personnel other than those whose appointment or dismissal is to be decided by the board of directors; and
- Any other function or power conferred on the manager by the board of directors.
- Functions and powers of the manager are otherwise provided in the articles of association, the articles of association shall prevail.
In practice, any actions rendered by senior executives outside the authorised scope should be approved by the BOD. Taking responsibilities beyond the scope could be deemed as an abuse of power.
We recommend that companies specifically provision additional functions and powers of senior executives in the Articles of Association.
Similar to the BOD, senior executives are forbidden from the following actions under Article 148 of the Company Law:
- Misappropriate company funds;
- Divert company funds into an account held in his name or the name of any other individual;
- Loan company funds or provide any guaranty to any other person by using company property in violation of the articles of association without first obtaining the consent of the board of shareholders, the general meeting or the board of directors;
- Become a party to any contract or business dealings with the company in violation of the articles of association without first obtaining the consent of the board of shareholders or the general meeting;
- Seek business opportunities for himself or any other person by taking advantage of his position, or operate on his behalf or on behalf of any other person any business similar in nature to that of the company, without first obtaining the consent of the board of shareholders or the general meeting;
- Personally accept any commission on any transaction to which the company is a party;
- unlawfully disclose confidential company information; or
- Act in any way that is inconsistent with his duty of fidelity to the company.
- Any income received by any director or senior officer in violation of this article shall be treated as the property of the company.
Under the Company Law, senior executives are also obliged to act with fiduciary duties. This refers to performing duties in the interest of the company. Specifically, senior executives shall perform duties with loyalty and due diligence according to corporate interests. And complying with the relevant law, rules, and regulations. Neglecting responsibilities, mismanagement and abuse of position may lead to severe repercussions for the individual – both civil and criminal proceedings.
The BOD can resolve to dismiss a senior executive for misconduct by the law. For example, the senior executive personally profits from the sale of company assets without the resolution of the BOD. However, a dismissal before the expiration term of the labour contract could be held liable for breach of contract.
Alternatively, the BOS, as the internal supervisory system could initiate an internal investigation. If BOS finds the senior executive has neglected the company’s interests, the Company Law permits the BOS to initiate litigation on behalf of the company. Where the violation is deemed criminal, criminal proceedings can be pursued.
Senior executives are important roles in a company and should be selected carefully. Although the scope of authority can be defined in the articles of associations, it is important to hire qualified senior executives.
If you would like more information about the role of the senior executives in China or other related corporate matters, send us an email at email@example.com, and we’ll have a Horizons professional contact you.